Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Endurance International Group Holdings Inc (NASDAQ:EIGI)
Q3 2019 Earnings Call
Oct 31, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Endurance International Group 2019 Third Quarter Financial Results Conference Call. [Operator Instructions] After the speakers presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Angela White, VP of Investor Relations. Please go ahead ma'am.

Angela White -- Vice President, Investor Relations

Thanks, Chris. Good morning, everyone. It's my pleasure to welcome you to our third quarter earnings call. First, we'll go through some prepared remarks, after which, we'll turn to Q&A. We prepared a presentation to accompany our comments, which is available in the Investor Relations section of our website at ir.endurance.com while not necessary to follow along, we recommend referencing the presentation slides alongside our prepared remarks.

As is customary, I'll now read the safe harbor statement. Statements made on today's call will include forward-looking statements about Endurance's future expectations, plans and prospects. All such forward-looking statements are subject to risks and uncertainties. Please refer to the cautionary language in today's earnings release and to our Form 10-K filed with the SEC on February 21, 2019, for a discussion of the risks and uncertainties that could cause our actual results to be materially different from those contemplated in these forward-looking statements. Endurance does not assume any obligation to update any forward-looking statements.

During the call, we'll reference several non-GAAP financial measures, including adjusted EBITDA, free cash flow, net debt and bank adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is available on the presentation located in the Investor Relations section of our website.

With that, I will turn the call over to Jeff Fox, our President and CEO.

Jeffrey H. Fox -- President and Chief Executive Officer

Thank you, Angela and good morning. Our third quarter results reflect continued operational progress executing our strategy to focus on engineering, sales and marketing investments on selected strategic brands. Revenue was $277.2 million and adjusted EBITDA was $80.6 million. We ended the quarter with approximately 4.8 million subscribers on platform, a net increase of approximately 10,000 subscribers from last quarter, including approximately 1,300 subscribers from our Ecomdash acquisition.

In the quarter, we purchased Ecomdash for approximately $9 million in cash, but also reducing our net debt by approximately $19 million. We are pleased with the net positive subscriber additions this quarter, an indicator that our investment focused on core strategic brands is working. We believe however that completing a return to revenue growth will be the strongest signal that the day-to-day execution of our plan has been effective. With a quarter of the year remaining, we are seeing revenue progress trail unit progress. We expect our revenue trend to continue to improve, but at this time, we are lowering our expectation for full year GAAP revenue to approximately $1.115 billion which does reflect continued progress toward topline inflection.

Turning to Slide 6, we operate two scale businesses, email marketing and web presence, both of which serve a converging small business marketplace that is growing in the U.S. and internationally. Our increased investment in engineering and product development is positioning both businesses to expand our total addressable market over the next several years. Specifically we are investing to complement our traditional web hosting and email marketing core service offerings by leveraging selected software assets including our builder and newly acquired Ecomdash capabilities across our strategic brands.

Turning now to our current segment performance. In email marketing our investments remain focused on expanding our solution set to serve more customers, evolving Constant Contact from an email marketing business into a digital marketing platform. We believe we can expand the reach of the Constant Contact brand to early lifecycle customers. During the third quarter we officially launched our Start Your Business solution set under the Constant Contact brand with products such as a free site-builder and domains. We also continue to invest in providing additional value to core email marketing customers through solution packaging improvements, such as our recently launched marketing and social media functionality. Along with seasonal pick-up in marketing spend, as we focus on 2020, we expect to increase investment in sales and marketing in the fourth quarter, in order to test our positioning in an expanded set of channels. In addition, we will be working with our Ecomdash team to leverage future capabilities and offers under the Constant Contact brand. Please note that the Ecomdash business was added to this segment in the third quarter of 2019, with approximately 1,300 subscribers.

Turning now to our web presence segment, our focus is on integrating assets to operate at scale. As a reminder, we have been investing to grow our team and business in Latin America and are pleased with the progress over the last several quarters. We are also investing more in our valuable assets and team in India, which has historically served the APAC market under multiple brands.

In 2019, we have focused on integrating our India-based marketing and engineering operations with our core web presence teams in the U.S. We expect this to result in expansion of our reach over time as we leverage a common technology platform. Overall within the segment, we remain focused on improving the user experience in order to deliver solutions with increasing value to customers across our strategic brands.

Turning now to Slide 9, in our domain business, we are investing to expand our overall web presence market position. We have historically focused on website hosting offers, while under-indexing our effort to attract the segment of the market that starts with early life products such as domains. In 2019 we have made significant improvements to the customer experience, which combined with the increased marketing spend, is delivering net unit growth. We see an opportunity to increase ARPS over time through the integration of additional products including our site builder, e-commerce, and Office 365 and G-Suite email offers.

As noted on our Q2 call, we've continued to experience weakness in the marketplace for our portfolios of premium domain names, which did pressure our year-over-year comparisons in this quarter. We continue to see progress as we focus our investments on our strategic brands and selected platforms. The team remain focused on the key drivers of returning to growth -- delivering more value to customers, simplifying operations, and executing our plan.

With that, I'll turn the call over to Marc Montagner to discuss our financial results in more detail.

Marc Montagner -- Chief Financial Officer

Thank you, Jeff. On Slide 12, I'm pleased to review our third quarter 2019 result. GAAP revenue was $277.2 million; adjusted EBITDA was $80.6 million. Free cash flow defined as cash flow from operations, less capital expenditure and financed equipment was $27.8 million.

Our year over year decline in adjusted EBITDA was due mostly to lower revenue and increased levels of investment in engineering and development, analytics, IT privacy and cyber security. This was partially offset by benefits from lower domain registration fees, lower data center costs, and lower program marketing spend.

GAAP cash flow from operation in third quarter was $41 million. Capex was $13.1 million. Year over year cash flow from operations and free cash flow were mostly impacted by the refinancing of our term loan in June 2018. The timing of the refinancing resulted in lower cash interest payments in third quarter of '18. In addition, capex year over year was higher.

Slide 13, we finished the third quarter with 4.780 million subscribers. Total subscribers increased by approximately 10,700 in the third quarter of 2019. Excluding the addition of approximately 1,300 subscribers that joined us as part of the Ecomdash acquisition, total subscriber increased by approximately 9,400 in the period. We are very pleased to see the trend in net subscriber growing from negative 67,000 in the same period a year ago to positive 10,700 in this third quarter. This is the first time we've been net add positive since the second quarter of 2016.

In the third quarter 2019, combined average revenue per subscriber ARPS was $19.35. In the web presence it was $13.32. In email marketing $69.79, and in domain $14.84.

Let's now turn to year-to-date results on Slide 14. Revenue was $836.1 million. Adjusted EBITDA was $235.5 million and free cash flow was $82.6 million. The lower adjusted EBITDA year-over-year is a result of a combination of lower revenue, increased investment in engineering and development, IT privacy, cyber security, and analytics. Cost savings in data center and lower domain registration fee partially offset the impact.

Slide 15, we are revising our guidance for 2019. As of the date of this call, our guidance for 2019, is the following. GAAP revenue of approximately $1.115 billion. Adjusted EBITDA of $300 million to $310 million; free cash flow of $110 million to $120 million. Given the delays in achieving an inflection point for revenue growth, we are lowering our revenue guidance for 2019. We also lowering the top end of our adjusted EBITDA guidance. Free cash flow guidance remains unchanged. Please also note that we intend to increase sales and marketing spend in the fourth quarter of 2019 versus the third quarter of 2019. This will result in lower adjusted EBITDA in the fourth quarter versus the third quarter. We expect capital expenditure of approximately $50 million in 2019. We continue to expect to use our excess free cash flow to pay down approximately $100 million of debt in 2019.

Slide 16, we ended the third quarter with $1.780 billion in total senior debt. Including other deferred purchase obligations and capital leases of $5 million, and total cash on the balance sheet of $86 million. Total net debt at the end of the period was $1.699 billion. During the third quarter we paid down approximately $25 million of the principal of our term loan debt.

Our LTM bank adjusted EBITDA for the period ended September 30, 2019 was $317.9 million. Our senior debt leverage ratio was 4.24 times and remain well below our maximum senior secured leverage ratio of six times.

Thank you for joining us today. And now, I turn the call back over to Jeff.

Jeffrey H. Fox -- President and Chief Executive Officer

Thanks, Mark. Just to reiterate, we are focusing on returning to top line growth as the team continues to simplify operations and execute Q4. Thank you for joining us this morning.

Now I'll turn the call back to the operator to begin Q&A.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from the line of Naved Khan with SunTrust. Your line is now open.

Naved Khan -- SunTrust Robinson Humphrey -- Analyst

Yeah, thanks. Just a couple of questions. Jeff, it seems like on the subscriber front, you have made progress obviously turned positive -- net positive. On the revenue front, probably not quite as there, can you just sort of give us a sense of that versus your own expectations where you might be lagging -- which areas you might be lagging in for revenue growth? And how do you plan to sort of address that? Is it that you're getting lower attach from these new subscribers that are coming in or lower cross-sell or other things that you mentioned like market plus weaknesses? And then just on the subscriber growth, can you just maybe even share some monthly trends how maybe the -- was -- did you exit the quarter stronger versus where you entered it?

Jeffrey H. Fox -- President and Chief Executive Officer

So I'll take the last one first. We don't -- we're not going to disclose that level of detail. I'll take the first question and really just keep this simple. If you really look at the result we produced in Q3 versus the play that we're running to try to focus on the brands. I'm personally very pleased and I think Marc is as well, just in the discipline of the team, on timing the spend for when we felt like the solutions and the market will be ready to receive and let us test our way to really inflect our topline. We are pleased with the operational simplification and the power of the focus we have on the brands that we are really investing in, and the platforms we're engineering against. We are a little disappointed, just in the attach rates, some of the unit production. It's a combination of factors, but --and so, no running from the fact that I'm a bit disappointed because obviously we've had to lower the guidance on our revenue inflection.

However, when I step back and think about the progress, the team has made, I'm just very pleased with the discipline and their execution, so far this year to get us in a position to spend the dollars on the right solutions and platforms and brands. So, I'm pleased with the progress, I'm a little disappointed that we didn't get a little bit more revenue.

Naved Khan -- SunTrust Robinson Humphrey -- Analyst

Got it. That's helpful. And then maybe a quick follow-up. So can you just give us a sense of where the subscriber growth is coming from, which geos [Phonetic]? Is it across the Board? Are some doing better than others? How should we think about it?

Jeffrey H. Fox -- President and Chief Executive Officer

In the aggregate, it's our big 4, right? I mean obviously you can see in Constant Contact we're still net negative, but we're really focused on growing, not only the subscribers, but the values of the subscribers get on our big 4 brands. It's a giving that to all run and work and grow is what we're focused on all day, every day. And we think HostGator Bluehost, Domain.com and Constant Contact have a place in the marketplace to be net unit positive and delivering more solution value over time. We think that that's out there, we see our competitors doing a great job running that play and we feel like we've -- we're forgetting better every day at running that, the right way for our customers that will ultimately yield revenue. Fair enough?

Naved Khan -- SunTrust Robinson Humphrey -- Analyst

From a geographical perspective, is it that maybe U.S. is where you're leading or is it Latin America or India? How should we think about that with respect to the subscriber growth?

Jeffrey H. Fox -- President and Chief Executive Officer

We're not breaking out the details that way. We're running an aggregated brand play on four brands and we're simplifying the tech stacks.

Naved Khan -- SunTrust Robinson Humphrey -- Analyst

Got it. Thank you.

Operator

Thank you. And our next question comes from the line of Arun Seshadri with Credit Suisse. Your line is now open.

Arun Seshadri -- Credit Suisse -- Analyst

Yeah, hi, thanks for taking my questions. In terms of the overall economic environment, anything you can add in terms of formation of new businesses, how renewals are doing churn etc. We saw some weakness in net domain additions from VeriSign. So just wanted to get some broad thoughts on the economic environment.

Jeffrey H. Fox -- President and Chief Executive Officer

I just, I don't think we're in a position to give you additional insight into the global macro. The -- what we're really focused on is making sure that we finish the thought on competing and delivering. Competing for the right customers in the right channels and then deliver them value. So I'm just, I'm not going to do any global macro commentary.

Arun Seshadri -- Credit Suisse -- Analyst

Okay. Just in terms of -- so it sounds like the economic environment is not in any way impeding subscriber revenue trends.

Jeffrey H. Fox -- President and Chief Executive Officer

I don't -- we're focused on, obviously, if the macro environment gets more difficult, it just means we have to work harder to achieve our objectives. I think the position we're in, if you followed our history, is that we were really selling website hosting across multiple brands and email marketing and the ability for us at our scale with the right investments and partnerships to expand our total addressable market, is what we're doing. And so I'm -- whether or not the global macro is out there changing around us, it doesn't really affect the play that we have to run to compete for and deliver value to customers. We have to stay focused on that.

Arun Seshadri -- Credit Suisse -- Analyst

Got it. Makes sense. And then the last thing from me is just wanted to understand, sort of, if you could quantify the marketing uptick in Q4. Broadly, what are your thoughts or is it too early in terms of you know year-over-year in 2020, what kind of marketing you expect sort of a general trend line. I would imagine would be upward. And then if you could comment also on the balance of ARPU and subs. And if there is anything in the promotional activity side that impacted the near-term numbers? Thanks.

Jeffrey H. Fox -- President and Chief Executive Officer

So I'd love for Mark, to answer your question, right? Because our actions are very different. But look, we're very focused. If you really look at our Q3, I think the team did a great job, not spending a few marketing dollars, so that we could do some more testing this quarter on some of the progress we've made in some channels that we've not historically spent quite as much money. And so, realistically, if you look at it, we did lower our EBITDA. We just took the top of the range out, so that's really -- I just want to make sure you guys know very pleased with the way the team is thinking and operating with increasing focus and discipline. So they're going to be testing this quarter, but we have a lot of prospect for our EBITDA range. And so we actually over performed a little bit in Q3 and we just don't want to surprise anybody that we're going to test some things in Q4 with some of the solution efforts we've made and some of the user experience progress we've made.

So I don't think we're trying to cause anybody to have grave concern about us becoming crazy spenders without real ROI and progress in mind. I'd like Marc to really chime in on we really, this is a little bit of a promotional calendar. There is, I know, I've seen some of our contact promotions as we do promotions but we do that every year. I don't think year-over-year, Marc, why don't you weigh in and give us some thoughts?

Marc Montagner -- Chief Financial Officer

It's the same thing, Arun. I think, obviously, Arun, Black Friday, Cyber Monday, there would be promotions. But it's just what we do every year, it's nothing unusual. In terms of, we're very pleased with the way the gross adds, came in the quarter. As you know, I mean different players in this industry have different go-to-market strategy. So enter with a premium model and we start with a discounted plan for the first two years, 24 months with a renewal at full price. So I think, very pleased with the subs that came in, in the third quarter.

And at some point they will renew, a percentage of them will renew at full price. And we pick-up more offs and more revenue -- and more GAAP revenue out of this. But the cash came in because they pay upfront for 12 months, 24 months, 36 months. But you sell the first period at discount and you recognize less GAAP revenue and that should basically come in once they renew at full price in the future.

Arun Seshadri -- Credit Suisse -- Analyst

Got it. That's helpful, Marc. And last thing free cash flow guidance you've maintained just wanted to any thoughts there -- where is that sort of upside coming from and then broadly for next year, I assume you expect somewhat consistent free cash flow, but any commentary there would be helpful. Thanks.

Jeffrey H. Fox -- President and Chief Executive Officer

So easy to predict. We're not going to talk about next year. And I think on the cash flow, I think, hopefully you guys will respect the quality of the effort the team is putting forth to manage opex, capex across the enterprise. I can't say enough about the discipline, the team showed. And what we're doing is, we are, we feel like we are ready now to test some more competitive effort.

Arun Seshadri -- Credit Suisse -- Analyst

Got it. Very helpful. Thanks guys

Jeffrey H. Fox -- President and Chief Executive Officer

Expect to get returns.

Operator

Thank you. And our next question comes from the line of Stephen Ju with Credit Suisse. Your line is now open.

Stephen Ju -- Credit Suisse -- Analyst

Okay, so thanks. So, Jeff, I think Endurance historically seen like a collection of on connected point solutions and it seems like you're now endeavoring to deliver I guess a more holistic offering. And in the process, increase the size of your subscriber acquisition funnel. So, do you think your portfolio of assets and services as far as you complete at this point between the partnerships, as well as the recent acquisitions, as you align yourself up with your competitors. And it sounds that way because you're playing a little bit more often with the marketing dollars, but any color you can offer there would be helpful. Thanks.

Jeffrey H. Fox -- President and Chief Executive Officer

So a great question, Stephen. I think that we -- when I use the phrase focus, simplify, execute we are in the finish the simplification so we can execute phase of this journey. And I can't say enough about the way the team is coming together and doing good things. We have picked our targeted engineering teams in tech stacks and we are bringing all the assets that are appropriately aligned to those tech stacks together. And so what that does is that does allow us to buy things like Ecomdash and know how to bring them to market without adding new brands to our platform.

And so, as I said Ecomdash will actually come to market over the next 12 months. Those capabilities in Ecomdash will be delivered on Constant Contact to potential Constant Contact users of the capabilities. And then the other three brands will decide where and how that functionality fits adding value to their customer base or their funnel. And so I use that as an example, because I think if people look at where we are now versus where we were two years ago, there are a couple of traditional places where if we find the right capabilities like Ecomdash we will consider acquiring some additional capabilities that we know fit into the value proposition that customers on our big four brands will look to get from us on an integrated platform. That is what we're doing and we are, I think we are in a position to do it efficiently and effectively. It is about the customer value and either through partnership acquisition or engineering effort. There is a lot more customers need from us, as they come through our four front doors, which has been the play we're running.

Stephen Ju -- Credit Suisse -- Analyst

Okay. Thank you.

Operator

Thank you. [Operator Instructions] And our next question comes from the line of John Byun with Jefferies. Your line is now open.

John Byun -- Jefferies -- Analyst

Hi, thank you. This is John Byun for Brent Thill. On the Q4 sequential marketing spend, could you give a little bit more color? Maybe -- not maybe, where you plan to focus maybe across brands or other aspects of it?

Jeffrey H. Fox -- President and Chief Executive Officer

It's the same four brands, we've got, we feel like we've got some things we want to test some new channels, a little bit of money in some channels, a little bit more money on some things. So it's not -- we're not talking about a radical shift of money. We're just talking about, we like what we're seeing and we want to -- we want to push a bit harder through the promotional part of the year. And see what response we get and use our analytics to really calibrate, what we think we can do to grow in 2020. It's a big four brands, we've got test to run on all four of them.

John Byun -- Jefferies -- Analyst

Okay. So there is no increased focus, let's say on Constant Contact versus some of the others or...

Jeffrey H. Fox -- President and Chief Executive Officer

Yeah, we're doing it imbalance, it may show up clearly Constant Contact is the biggest of the four assets. And so it will likely, I mean without giving you the specifics on the hood, it will definitely be getting more pro rata share of the quarter-to-quarter increase.

John Byun -- Jefferies -- Analyst

And then, the new I guess bundled offering for Constant Contact and curious to see if you can share any feedback on what the response has been so far? I mean, I do see the landing page on the website. Although, you have to click a couple of times to get to it, but just curious, what you've seen so far since the formal launch?

Jeffrey H. Fox -- President and Chief Executive Officer

So we've -- I mean not to be colloquial. But I've seen some really happy customers, that have received the ability to do things other than mail under the brand. I've seen a couple of actual websites and more than a couple. And so it is a natural thing for a customer that is -- that knows, that maybe was looking for email marketing to have decided, hey, I'll try to [Indecipherable] I'll actually refresh my logo or create a local logo. So it's a natural additional place for us given that we have traditionally skewed toward small businesses and some folks are ultimately want a good price point and do stuff themselves. So it's a pretty natural -- it's a very natural. I would tell you the team is working hard on taking the first integration and really grinding through, really improving the user experience progressively over the next 12 to 24 months.

We feel like it's good enough, the customers are given us pretty good feedback that they're happy with what we're doing and the overall economics, are very competitive. We're trying to be very competitive. But why is about delivering value and increasing user experience. And so open the feedback so far has been the brand will benefit from the extra capabilities. Customers will get value, and that's what we will continue to measure and test. We will, we have to improve the overall integration experience the same way our competitors put stuff in the market and then continue to refine it. It's same framework.

John Byun -- Jefferies -- Analyst

Great. Thanks very much.

Jeffrey H. Fox -- President and Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Angela White -- Vice President, Investor Relations

Jeffrey H. Fox -- President and Chief Executive Officer

Marc Montagner -- Chief Financial Officer

Naved Khan -- SunTrust Robinson Humphrey -- Analyst

Arun Seshadri -- Credit Suisse -- Analyst

Stephen Ju -- Credit Suisse -- Analyst

John Byun -- Jefferies -- Analyst

More EIGI analysis

All earnings call transcripts

AlphaStreet Logo